Member Article

Financial services see unexpected fall in business volumes

A survey of financial services firms has shown the first fall in business volumes since June 2009.

The CBI/PwC survey found the overall level of business in the financial services sector to be “substantially” below normal, however firms expected growth in business volumes to resume next quarter.

Incomes from fees, commissions and premiums, and from net interest, investment and trading fell -15% and -29% respectively.

The number of people employed in the financial services fell unexpectedly by a balance of -22%, as an increase of +15% had been expected.

Over the next 12 months, businesses reported they plan to spend significantly less on land and buildings, and on vehicles and plant and machinery.

The need to address the burden of statutory legislation and regulation was again a key driver behind business costs and capital expenditure plans over the coming year.

Uncertainty about demand was found to be the factor most likely to limit companies’ investment expenditure.

Matthew Fell, CBI Director for Competitive Markets, said: “The financial services sector has faced a tough quarter, with sales volumes unexpectedly falling and average costs rising, thus denting profits. Sentiment about the business situation also continued to fall.

“Nevertheless, companies expect this recent weakness in activity to be temporary, and anticipate that growth in business volumes and incomes will return to positive territory next quarter.

“However, uncertainty about demand, heightened by the need to fully resolve the ongoing Eurozone crisis, and the looming US fiscal cliff, means that firms are scaling back their investment intentions for the coming year and reducing headcount.

“Meanwhile financial services firms continue to allocate more resources to deal with the increasing burden of new legislation and regulation, like Solvency II for insurers and Capital Requirements for banks – a trend which is expected to continue for some time to come.”

Banks reported that business volumes were below normal, and the fall in business was entirely due to lower business with financial institutions.

Volumes at building societies grew for the third quarter running and income from fees and commissions also grew.

Iwan Griffiths, Northern financial services leader at PwC, said: “The outlook for banking is dominated by concern about weak demand, seen as the greatest threat to growth and the leading barrier to investment, and the growing costs of regulation.

“It is promising that commercial business is growing again, which reflects the banks’ increasing efforts to meet social and economic expectations by increasing their lending to businesses. Growth in retail banking has come to a halt as the banks focus more on commercial than consumer lending.

“The Bank of England’s announcement of Funding for Lending has had a perceptible impact on building societies’ mood, and some societies are feeling slightly more positive about the outlook for their business. It represents a welcome opportunity for the societies to get around the challenges of deposit and wholesale funding and begin to slowly grow their balance sheets.

“Regulation remains the greatest source of uncertainty for building societies. These concerns, together with continuing pressure on spreads and profitability, are encouraging the societies to keep their operating costs under control. If Funding for Lending does relieve some of the pressure on societies’ margins, it could allow the sector to commit more capital to marketing, product development or infrastructure improvements.”

In insurance, life insurers saw increased volumes for the eleventh consecutive quarter, while general insurers saw a fall.

Andrew James, Northern insurance leader at PwC, said: “Life insurance volumes are booming as firms are continuing to chase business aggressively prior to the introduction of the Retail Distribution Review (RDR). 96% of respondents reported higher total costs, the highest in six years.

“As the requirements of Solvency II and RDR drives up headcount, and the shortage of actuarial talent drives up wages, insurers will have to develop simpler, more transparent products with lower management charges to capitalise on volume growth.”

Investment firms were more optimistic than three months ago, and although growth in the volume of business was a little slow, it is expected to accelerate next quarter.

Securities firms were less optimistic as volumes fell for the fourth successive quarter, and faster than expected.

Gary Shaw, Northern leader for asset management at PwC, said: “Interest in the possibilities of M&A and other strategic alliances is growing as securities trader’s revenues are falling fast.

“A weak M&A market and historic lows of capital issuance have both contributed to decline in fee income. This coupled with a noticeable cost per transaction rise, has led to some headcount reductions.

“The clear implication is that the sector needs to do far more to reduce costs to a sustainable level. 2013 may see consolidation eliminate some overcapacity from the securities market.
“Investment managers remain the most optimistic sector in financial services, buoyed by the prospect of stronger fee income and improved profitability.

“The desire to reach new customers is seen as a much more important driver of capital investment than regulation. This is not only at odds with the rest of the industry, it is also inexplicable given the range of new regulation facing investment managers.”

This was posted in Bdaily's Members' News section by Tom Keighley .